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SÃO PAULO -- The Brazilian real plunged against the dollar Thursday and stocks plummeted as the country's Supreme Court approved an investigation of President Michel Temer following a report he encouraged a businessman to continue bribing a jailed former congressman to buy the lawmaker's silence, putting the future of his government and the approval of key economic overhauls by Congress at risk.

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Mr. Temer has denied wrongdoing.

The real exited from active trading at 3.39 to the dollar, according to Tullett Prebon via FactSet, after closing at 3.13 on Wednesday. The Ibovespa stocks index closed 8.8% lower, after dropping 10.5% shortly after the open and tripping a circuit breaker that temporarily halted trading.

Government-controlled companies were among the biggest decliners in the Ibovespa, with the preferred shares of oil company Petróleo Brasileiro SA, or Petrobras, closing 15.8% lower and power company Eletrobras SA's preferred shares ending down 17%.

O Globo newspaper reported that Joesley Batista, chairman of meatpacking giant JBS SA, recorded a conversation with Mr. Temer in which the president indicated Mr. Batista should continue to pay the former legislator, Eduardo Cunha. Lawyers for Messrs. Batista and Cunha declined to comment.

Mr. Cunha was convicted this year of money laundering and corruption as part of the Operation Car Wash anticorruption probe. O Globo reported that Mr. Batista told Mr. Temer about regular payments to Mr. Cunha, and that the president said Mr. Batista should continue the payments.

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Mr. Temer has been trying to push through Congress unpopular overhauls to Brazil's insolvent pension system and to its complicated labor regulations. The report in O Globo has effectively destroyed his support among lawmakers, said Pedro Paulo Silveira, chief economist at the Nova Futura brokerage in São Paulo.

"I have no doubt that the Temer government is over, and it's impossible to talk about anything getting through Congress now," Mr. Silveira said. All the money that had entered Brazil in expectations of the overhauls passing will now leave, he added

President Temer is already losing support in Congress. The Podemos party said Thursday that its 13 members in the lower house have left the governing coalition.

Write to Jeffrey T. Lewis at jeffrey.lewis@wsj.com and Luciana Magalhaes at Luciana.Magalhaes@wsj.com